By Alessandra Malito, MarketWatch
Luke Huffstutter, owner of Annastasia Salon in Portland, Ore., said a wry joke runs through the hair-salon business in the U.S.: “When was the last retirement party you attended?”
The answer is never. That’s because stylists tend to work for small businesses, most of which don’t offer retirement-savings plans. Thus, stylists don’t retire.
But failing to save for retirement isn’t funny, and even if Huffstutter’s team stays in his employ for decades, his salon workers, like all Americans, will need money when they stop working.
“We have a responsibility to prepare them for after-work,” he said. “That’s just my belief as an owner. That’s my responsibility.”
Half of the private-sector workforce — some 58 million full- and part-time workers, is not participating in a workplace-sponsored retirement plan.
Huffstutter spent a decade looking for the right retirement plan, with little to show for it. His business is successful — the company expects to net more than $2 million in sales this year — but, like many small businesses, has never been profitable enough to sustain a 401(k) plan.
At the same time, he knew that offering anything less than ideal would come at a cost to employees, in the form of tacked-on fees that would inherently damage their future balances. He solicited bids from six administrative companies, but nothing worked out.
Then along came Oregon’s state-sponsored retirement program, OregonSaves.
To get 10 members of his company to start saving for retirement on their own took him 10 years, he said. With OregonSaves, 26 people were able to sign up in 10 minutes. In the past year and a half, those employees have saved more than $56,000 in total. Huffstutter, who had financial advisers visit the salon to speak with employees about financial planning, estimated that 95% of his 42 employees are now saving for retirement, either through OregonSaves or outside of the program. His goal: 100%.
It was his dream, Huffstutter said, “that everyone would be saving.”
Ten states sign on
Ten states including Oregon, California and Illinois are stepping forward to answer the prayers of small-business owners such as Huffstutter, who want to offer their employees a retirement plan but can’t afford to get it off the ground on their own, or might not know where to look.
Half of the private-sector workforce — some 58 million full- and part-time workers, according to the Pension Rights Center — is not participating in a workplace-sponsored retirement plan, a deficit that, if it continues, could quash workers’ futures and health, and strain the U.S. economy.
In the U.S., no employer is legally required to offer a retirement plan. Employers, especially small businesses, that don’t offer retirement plans to their workers often complain that doing so is too complicated and expensive. At the same time, even some employees who do have access to a plan don’t invest if they’re not automatically enrolled.
There are significantly fewer companies offering traditional pensions these days, opting instead for defined-contribution plans like the 401(k), which require employees to voluntarily save for their futures rather than, as under a pension plan, receiving from the company a predefined amount for the rest of their lives. Only 16% of Fortune 500 companies offered a pension to new hires in 2017, down from 59% in 1998, according to London-based insurance company Willis Towers Watson. Some companies, like aerospace company Boeing /zigman2/quotes/208579720/composite BA +3.75% and apparel-tag maker Avery Dennison /zigman2/quotes/200970384/composite AVY +3.12% , have eliminated or frozen their pension plans.
In the past few years, 10 states — Maryland, Connecticut, New Jersey, New York, Washington state, Vermont and Massachusetts, in addition to Oregon, California and Illinois — have agreed to create a retirement program designed for the private sector, and nearly all other states are considering implementing one. One city, Seattle, is offering its own program to those without a workplace-savings plan.
State-based Roth IRAs
The state plans are Roth individual retirement accounts (Roth IRAs), but employees are able to automatically invest in them through payroll deductions, as they do with 401(k) plans. The contribution limits are lower: IRAs allow a maximum of $5,500 (or $6,500 for individuals 50 and older) a year, compared with 401(k) limits of $18,500 (or $24,500, respectively). Because the state plans are Roth accounts, they are funded with after-tax dollars, and therefore are withdrawn tax-free at retirement. Individual retirement accounts are typically used by workers who don’t have access to a 401(k).
Oregon’s version of the plan has become a model: In just over a year since its pilot began, OregonSaves has amassed more than $7.6 million in contributions in about 19,100 accounts. That figure jumps by about $200,000 every week, according to Tobias Read, Oregon’s state treasurer.
“It’s a good step forward to getting more people covered,” said Jamie Hopkins, the retirement-income program co-director at the American College of Financial Services in Bryn Mawr, Pa.
California is starting its pilot program in November, and contributions will begin with the first payroll cycle after Jan. 1, 2019. The statewide launch is slated for July 1. The state is even considering opening up the program to individuals who are self-employed or working in the so-called gig economy, said Katie Selenski, executive director of the program, called CalSavers. Illinois’ program, Secure Choice, began its pilot program in May.
Some members of the financial-services industry argue that states shouldn’t be providing those sorts of plans, and that they offer a weak alternative with limited investment choices as well as higher fees.
Still, workers have to start saving somehow, and if they aren’t taking the initiative to do it on their own, states have decided to act for them. Without any improvement, there could be disaster. Americans won’t be able to afford leaving their jobs, instead working well into old age with assorted ailments illnesses. The federal and state governments will suffer as well, financially and societally, as their budgets are drained to care for and support elderly individuals.
The crisis is deepening
The federal government finally has taken up the issue. President Trump signed an executive order at the end of August directing the Treasury and Labor departments to review current policies and consider regulations that would make it easier for small businesses to offer 401(k)-type plans. “We believe all Americans should be able to retire with the confidence, dignity and economic security that you want,” Trump said of the executive order.
Study after study shows Americans losing confidence in a prosperous retirement, and yet, despite this, many are still not preparing properly. Some workers have said they just can’t set aside money living paycheck to paycheck, while others can’t make sense of financial advice and become discouraged, thinking they’ll never be able to figure it out.
Some 46% of Americans anticipate they won’t be financially comfortable in retirement, a Gallup poll in May found. The number of people who feel that way has grown since Gallup first began tracking this sentiment in 2002 to 2004, when 36% of nonretirees didn’t expect that they’d live comfortably in retirement.
It gets worse. Not only do half of Americans feel unprepared; many truly are. One in three Americans has less than $5,000 saved for retirement, and one in five has no savings at all, a 2018 study by Milwaukee-based Northwestern Mutual found. A third of baby boomers, who now range in age from 54 to 72, had somewhere between zero and $25,000.
Millennials buried in debt
Millennials, those born between 1981 and 1996, according to the Pew Research Center, are already expressing skepticism about their capacity to exit the 9-to-5 world. A MarketWatch article about saving for retirement in your 30s went viral in May, after it infuriated thousands of 30-somethings who read a suggestion by Boston-based Fidelity Investments, the largest 401(k) plan provider, that they should have twice their annuall salary saved by the time they’re 35 years old.
Many took to Twitter to express frustration with that concept, arguing they were too busy balancing the costs of student-loan debt, high rents or mortgages, daily responsibilities, and helping their parents and children to even think about stashing money away for retirement.
Even if saving even a small amount of money is beneficial, some millennials said it simply wasn’t realistic. Americans have more than $1.5 trillion in student debt, much of it carried by the millennial generation.